Archive for December, 2016

Reinsalu is turning Estonia into another Panama – attorney

Aripaev writes that the proposals made by Justice Minister Urmas Reinsalu on amending the commercial code in a way that would ease requirements on e-residents may turn Estonia into another offshore country just like Panama.

Attorney at law Sten Luiga says that the current regulation is already too liberal because it enables owners who wish to get rid of debts to sell their companies to residents from exotic countries.

“It will go from bad to worse if the state now abolishes the requirement on the domicile of the management board to be in Estonia,“ Luiga.

Justice Minister announced recently that it has prepared proposals to make company management more modern and flexible by allowing foreigners who do not reside in Estonia to set up companies in Estonia and belong to their management bodies.

The only requirement is that the company myst be registered in Estonia. At present the law requires that also the company’s management board is domiciled in Estonia.

“Such proposals in the situation where the state cannot even investigate fraud committee in Estonia is absurd as bankruptcy procedures get longer and longer, often failing to reach a solution,” said Luiga.

He said that it is questionable whether making setting up companies in Estonia as easy as in Panama is going to bring more money into the economy.

“It will only create troubles and make Estonian companies pariahs in developed countries,” he added.

“If such proposals are implemented, Estonia could become a favourite place for international fraudsters. It will take one prominent case on the international area to tarnish the reputation of Estonian companies,” said Luiga.

AIM AT MORE FLEXIBILITY

A week ago Justice Minister Urmas Reinsalu unveiled a bill which would allow the management board of a legal entity to be located abroad and thereby create the possibility of running Estonia-registered companies from another country.

Reinsalu said that the aim was to make the management of Estonian non-profit associations and companies more flexible and enable the use of modern information technology resources.

This way foreigners who do not live in Estonia will be able to use Estonian e-solutions, establish legal persons and belong to their  management bodies. Under the present law the management board of a legal person must be situated in Estonia.

“The requirement that the management board of a company must always be located in Estonia makes Estonia less attractive to e-residents, which is why we developed the bill. The rules of commercial law must serve economic competitiveness, not impair it,” Reinsalu explained. “We’ve found a working solution which also ensures legal certainty of Estonia’s commercial law.

“The solution we’ve offered in the bill is that, in the case the management body of a legal entity is situated abroad, it will be required to appoint an Estonian contact person with a checked background who will have the right to accept expressions of will and documents addressed to the legal entity,” the minister said. “If a legal person whose management body is not located in Estonia does not appoint a contact person the registry keeper can initiate its compulsory dissolution.”

The proposed changes would thus ease the requirements concerning the location of the management body, but the legal entity itself would still have to be located in Estonia.

Tax authority’s new weapons

Aripaev writes that the amendments regarding taxation of dividends that are entering into force in November are giving the tax authority new weapons to fight tax dodgers.

The tax authority has already initiated several proceedings that could amount to tens of millions of euros in unpaid tax.

Starting from November 1, business undertakings that receive a dividend from their non-resident subsidiary must be ready to explain to the tax authority why they have a foreign subsidiary in the first place.

According to the amendment in the taxation of dividends act, business undertakings must prove that they have not set up a subsidiary abroad to gain a tax exemption in Estonia.

This means that companies must first prove to the tax authority that their subsidiaries abroad have sufficient business and were not set up for tax optimisation purposes.

Kaido Lemedik, deputy head of the tax authority’s audit department, warned that Maksuamet is closely communicating with tax authorities of foreign countries, and in case of suspisions, is asking information from authorities abroad.

The amendment concerns all business undertakings who own at least 10 percent of a subsidiary abroad that grants them an exemption  from paying 20% income tax when the dividend is paid to the parent company.

Last year, 435 busienss undertakings received a dividend from a foreign subsidiary.

One red flag for the tax authority is when an Estonian company buys a business undertaking abroad, takes out the profit in the form of dividends and sells the company, because this means that transaction was made only for tax exemption pruposes.

Unlike in most other countries, Estonian resident business undertakings pay income tax on profit only ince it is paid out in dividends at a rate of 20%.